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Profits, Profits Everywhere

Corporate Research E-Letter No. 24, May 2002

Profits, Profits Everywhere – And Soon Not a Drop to Drink

by Mafruza Khan

In a May 2000 special issue on privatization of water, Fortune magazine dubbed water the “oil of the 21st Century.” The worldwide crisis of freshwater supplies is so great that it is now a commonly held belief that the wars of the 21st Century will be fought over water. Water represents the last of the global commons to come under the control of market forces. Cash strapped governments are increasingly acquiescing to fiscal pressures and lobbying by transnational corporations to privatize water. Despite being a relatively new sector, studies show that water privatization has often led to many unfulfilled promises.

THE STAKES

The global water industry is valued at about $400 billion annually. This includes everything from privately owned and/or operated municipal and regional water systems, bottled water, dams and waterways, water desalination and purification systems to large-scale water exportation via supertankers. The private water sector in the United States generates more than $80 billion a year in revenues. “Water stock fundamentals look good, and over time, the stocks should continue showing gains, ... if not outperforming the market,” says Schwab Capital Markets analyst Debra Coy.

In the United States, local governments have generally assumed responsibility for providing water services. About 80% of municipal and regional water systems in the United States continue to be in the public domain. The remaining are served by corporations. Cities such as Atlanta and Indianapolis have only recently privatized their municipal water systems, while cities such as New Orleans have had privatized water systems since the early Nineties. Europe’s leading water companies see the United States as the last bastion of water services not yet under private control. Still largely unknown to the public, private water companies are quietly pushing the agenda for privatizing municipal water in the United States and in third world countries to gain control of this new market.

The stakes for communities, particularly poor ones, are also very high. In 2000, in Cochabamba, Bolivia, a seventeen-year old student was shot in the face by the Army during protests sparked by an increase in local water rates. The government had declared martial law. The chief demand of the protesters - peasants, ordinary citizens and trade unionists - was the removal of a private foreign-led consortium dominated by United States-based Bechtel Corporation. The company’s executives fled after they were told that the police could no longer guarantee their safety. The Bolivian government revoked the contract with the consortium as it had abandoned its concession. A new national water law was passed, which protected small independent water systems, guaranteed public consultation on rates and gave social needs priority over financial goals. Bechtel is suing the Bolivian government for $40 million at the World Bank’s Center for Settlement of International Disputes.

TOWARDS PRIVATIZATION IN THE U.S.

The United States has 76,000 public waterworks, of which about 60,000 remain under public control. But all that may change rapidly, as cities and states across the nation respond to water shortages, crumbling infrastructures and fiscal pressures by looking to privatization as a panacea.

In a 1996 report on drinking water, the United States Environmental Protection Agency estimated that the U.S water system would need $140 billion through 2016 to meet standards. While the Clean Water Act and the Safe Drinking Water Act have imposed stricter water quality and effluent standards, the federal government has reduced its contributions to local water systems over the past 30 years. At the same time, public funds have been doled out to subsidize corporations and industries in ways that exacerbate the water crisis. For example, the city of Austin, Texas, charges companies water rates that are less than two-thirds of what homeowners pay.

The push for privatization reached a new level with the introduction of the Water Investment Act of 2002 (S. 1961). If it passes, local municipal water authorities would be required to consider some form of privatization.

Both the Association of Metropolitan Water Agencies (AMWA), a non-profit organization representing the nation’s largest publicly owned water agencies supplying drinking water to 110 million people nationwide, and the National League of Cities (NLC), representing 18,000 cities across the nation, have expressed their strong reservations about the privatization component of S. 1961. According to privatization experts, among the issues that need further exploration are those surrounding accountability and the blurring of roles and responsibilities. For example, who pays if the private partner fails? Both groups contend that legislating privatization of water may not be in the public interest.

Public employee unions, such as the American Federation of State, County and Municipal Employees (AFSCME), which represent municipal water workers have led fights to prevent the privatization of municipal water systems in Arizona and New England. AFSCME has also issued its position on the federal Water Investment Act of 2002, specifically stating that while it supports expanded funding for the nation’s drinking water and wastewater infrastructure, it is strongly opposed to provisions in the legislation that promote privatization of local water systems.

Another question that is being raised by AMWA and NLC is the impact of international trade agreements on water privatization. Since four of the major companies involved in the U.S. municipal/regional water market are based in other countries, it is unclear how that would affect the ability of a local government to retain local control and autonomy over its water system.

Privatization Models

Water privatization usually takes three forms. First, there is the complete sell off by governments of public water delivery and treatment systems. This was the model used in the 1980s by the Thatcher government in the United Kingdom. The British water corporations received huge government subsidies and the right to raise water charges annually well above the inflation rate.

The results of privatization in the United Kingdom were not encouraging. Customers saw their rates soar, there were severe water shortages, little had been reinvested in the aging infrastructure and thousands of low-income people had their water disconnected. Public outcry and negative media coverage eventually led the to the process being modified to reintroduce stronger government oversight and regulation.

The second model, developed in France, grants concessions or leases to water corporations to take over the delivery of the service. The corporation bears the costs of operating and maintaining the system, collects the revenues and keeps the surplus as a profit. The French system has produced numerous incidents of corruption. The former mayor of Angouleme was convicted and sentenced to two years of imprisonment for taking bribes from companies bidding for public water concessions. Executives of a major water company were convicted of bribing the mayor of St. Denis in order to obtain a water contract.

A third, more restricted model allows governments to contract with a corporation to manage water services for an administrative fee. The corporation, however, is not allowed to collect any revenues or reap any profits from surpluses. While all three forms have elements of privatization, the second type, often referred to as public-private partnerships, is the most common.

In the United States, the first and the second model have been used. Even the limited experience here suggests that lack of accountability is an issue. This is clearly illustrated in a 2001 report by Public Citizen called Water Privatization: A Broken Promise. Through 13 case studies of water privatization, the report also shows that some municipalities have tried to regain control of their water and have gotten lower rates in the process.

THE INDUSTRY TITANS

Ten corporate players dominate the global water industry. According to experts, they fall into three categories. The first tier is composed of two French companies, Vivendi Universal and Suez, which together control over 70 percent of the existing world water market. Suez operates in 130 countries and Vivendi in over 90. The second tier consists of four consortia: Bouyges-SAUR (France), RWE-Thames Water (Germany), Bechtel-United Utilities (U.S/UK), and the former Enron-Azurix. The third tier is made up of a group of smaller water companies that have developed considerable expertise and capacity. It includes three British companies and one U.S-based company, American Water Works Company.

Suez

CEO Gerard Mestrallet promotes the worldwide expansion of Suez into new markets as a philosophy of “conquest” in keeping with the company’s origins as the developer of the Suez Canal. The $37 billion company’s core businesses are: water, energy, communications and waste management services. Water services, under the brand name ONDEO, constitute about 26.4 percent of total revenues, with close to three-quarters of that coming from international markets. The U.S. is targeted as one of Suez’s major growth markets for water services. The company’s U.S. acquisitions include United Water, which operates in 17 states.

The company’s track record is at best mixed. In the United Kingdom, the government’s drinking water inspectorate announced in July 1999 that Northumbrian Water, a Suez subsidiary, had the second-worst operational performance in England and Wales, the main factor being poor water quality. In Budapest, Hungary, the municipal council rejected a business plan for water services presented by a consortium of Suez and RWE in July 1999, because it would have resulted in large financial losses for the city while reaping huge premiums at both companies.

Vivendi Universal

Vivendi Universal is composed of two main divisions: 63% owned Vivendi Environnement, with four subdivisions – water, energy, waste management and transportation services, and Vivendi Communications, which includes Seagram’s Universal units, Canal Plus and USA Networks. Vivendi Universal’s combined revenues for 2001 were $50 billion. The company reported a net loss of $11.8 million for the year. Vivendi Environnement accounts for about 50 percent of total revenues. The company has been dogged by questions about debt levels and financial transparency in its switch to U.S. accounting rules in 2001. Chairman Jean-Marie Messier continues to be headline news amid dissatisfaction over the company’s strategic direction, ballooning debt and poor stock performance.

Generale des Eaux, Vivendi’s main international water company, and U.S. Filter, the largest U.S water services company until 1999, when Vivendi bought it, are the most profitable segments of Vivendi’s businesses. After purchasing U.S. Filter, the company secured a series of concessions in the U.S. and Canada. With a market 14 times larges than its nearest competitor, U.S. Filter is expected to play a key role in Vivendi’s water privatization plans in the United States. Vivendi Environnement’s $1.5 billion 20-year contract with Indianapolis is the largest private contract ever awarded by a U.S. city.

Similar to Suez, Vivendi’s track record is mixed. In Berlin, the German Green Party launched a court challenge claiming that Vivendi’s water prices and guaranteed dividends were unconstitutional. The Constitutional Tribunal Court agreed. In the United Kingdom, a joint venture between Vivendi, Suez and Bouyges was publicly criticized when it laid off 3,200 workers after the government ordered the consortium to reduce its prices.

SUSTAINING LIFE VERSUS SUSTAINING PROFITS

There is a fundamental and inherent contradiction in privatizing finite natural resources like water: Since the goal of corporations it to maximize profits, commercial purveyors of water have no incentive to promote conservation, which is the most fiscally and environmentally prudent way to manage water.

Without proper regulation and equitable distribution requirements in place, the privatization of finite natural resources essential to life, such as water, will inevitably lead to a two-tiered society – those who can afford to purchase it in adequate quantities and those who cannot. Avoiding this outcome will require preservation of tax-supported municipal water systems that are accountable to citizen oversight, rather than relying on private corporations.